Competitiveness 2.0

What is at Stake?

We are entering a new era, one in which resource costs are rapidly becoming an ever more significant economic factor.

Today, resource demand is so high that biocapacity — the services and resources that nature makes available — is being overexploited, not just locally but at the planetary scale. If these trends continue, resource constraints will become a leading factor determining economic success — or crisis — in the 21st century.

Course corrections are still possible. But these physical resource trends are slow-shifting and hard to reverse. As with super-tankers, course corrections need to be taken early and decisively to avoid disaster.

Recognizing these new dynamics offers opportunities. Proactively addressing resource constraints is in the direct self-interest of nations. Nations that adjust to this new reality and limit their resource dependence will accrue the benefits of new opportunities and risk reduction.

Decision-makers must better recognize all the key economic drivers of success. Without reversing trends, the impacts of the growing resource gap might rise substantially, and become increasingly non-linear and volatile. Those who fail to act will lose their competitive advantage as potentially rapidly growing resource costs eat up more of a nation’s income.

Resource constraints are global, but the risks and opportunities they create are largely local. For nations that want to succeed, we are proposing an updated competitiveness framework: Competitiveness 2.0.

Mathis Wackernagel and André Schneider

Where We Come From: Increased Global Integration

Over recent decades, the world has become increasingly interconnected. Now, for companies to succeed, they have to stay ahead of their global competition, not just their local neighbors. World-class performance has been key to their success.

Against this backdrop, the theory of "competitive advantage" emerged. This theory, advanced by Harvard scholar Michael Porter in 1985, suggests that states should, as a focus of their national strategies, embrace productivity growth and adopt policies that allow their businesses to create high-quality goods to sell at high prices.

This Competitiveness 1.0 approach is based on the assumption that the well-being of a country, measured by its GDP, would improve by creating the most beneficial national and global regulatory frameworks for business growth. Such an approach would increase revenues of companies and citizens' salaries, which in return would boost a government's tax income. A country’s competitive advantage, the theory holds, enables it to invest in its social structures and build its social capital.

The acceptance of the competitive advantage framework as the engine for progress has had a profound impact on national strategies:

States and companies consider it the gateway to increasing their GDP and ultimately their citizens' income. In turn, income is seen as a core contribution to improving citizens’ well-being, and GDP the main indicator of progress;

The emergence of measures, including rankings used as benchmarks, of the competitive advantage of countries. These measures in turn become a catalyst for countries: As governments attempt to meet specific benchmarks, they improve their competitive advantage by changing their regulatory frameworks.

Where We Are Today: Facing Planetary Boundaries

Economic success in past decades has translated into resource consumption levels that are no longer sustainable. As a result, nations’ efforts to drive their competitive advantage could be a race to disaster: As they maintain their income (or GDP levels), countries are liquidating their assets by running fiscal deficits or overusing biophysical resource stocks.

All life requires ecological resources, including water and biomass, for its survival. Most industrial societies are still highly dependent on easily accessible fossil energy resources. Increased pressures on these resources can lead to non-linear effects, including price volatility or supply disruption, with potentially severe shocks for the global economy.

Current metrics for competitiveness and economic performance largely ignore resource constraints and their potentially non-linear dynamic ignited by supply gaps. While the global market can smooth over local disruptions initially through trade, market participants will be exposed to world shortages simultaneously. Such potential system shocks will be accelerated if nations with critical resources focus on securing domestic demand before serving the global market.

In essence, classical competitive advantage strategies are leading to overuse of our natural resources: We now see global overshoot of biocapacity, overuse of freshwater and soils, the depletion of fossil energy and mineral assets and other ecological exhaustion (see Lester Brown's World on the Edge, 2011, Norton, Washington, DC or Global Footprint Network).

Countries meanwhile have tried to maintain the benefits of their past competitive advantage without maintaining their competitive positioning. The mounting debt and inability to repay have started to erode the ability of countries to deal with their national challenges.

The growing resource risks, accentuated by the global race to competitive advantage, are starting to undermine not only countries' ecological and economic health, but also the prospects for humanity. In the face of this “race to disaster” dynamic, there is a profound and urgent need to find answers to the following questions:

Considering the pressure of resource dependence on countries’ competitiveness and social stability, and the potential threat to a country’s survival, how will governments aggressively manage their resource dependence?

What competitiveness plans do countries have in place to succeed in a resource-constrained world?

The Way Forward: Competitiveness 2.0

The new resource context calls for an upgrade of the classical model of competitive advantage that addresses the rapidly shifting resource dynamics. Besides the main components of such resources (e.g. biocapacity, water, fossil energies, minerals), which are crucial to sustainable well-being, the next generation of competitiveness models should include the following elements:

Without an adequate and secured supply of resources, a state will be unable to offer any lasting basis for operating. Resource shocks will come as surprising disruptions (in the absence of a well-functioning market) or volatile price increases, eating up countries’ economic progress. Such a scenario can easily reduce — if not annihilate — a country's competitive positioning, and can in the extreme case lead to the situation of a failed state.

In the case of ex-territorial resource dependence, countries need to find ways to procure missing resources. They will only be able to do so if the country has sufficient financial means. As a national debt becomes too large compared to the country’s GDP, a country will lose its ability to address resource deficits. A country’s debt, its sovereign savings, its government’s budget balance and its import–export balance will all become more important determinants of the country’s “licence to operate” — a term we use in our new competitiveness model as shorthand for a nation's financial health and ability to cope with rising resource costs.

The need to revisit the concept of well-being beyond GDP. GDP is blind to many factors, including the inequalities and limitations that can lead to social tensions and unrest. To maintain social stability and human progress, the new competitiveness models must consider factors such as public health and life expectancy, access to education, wealth creation, and a sense of fairness and equality. The UNDP's Human Development Index, for instance, points in this direction. We label this important element “added value to citizens” — i.e., benefits that governments demonstrably deliver to their populations.

The need to revisit the concept of well-being beyond GDP. GDP is blind to many factors, including the inequalities and limitations that can lead to social tensions and unrest. To maintain social stability and human progress, the new competitiveness models must consider factors such as public health and life expectancy, access to education, wealth creation, and a sense of fairness and equality. The UNDP's Human Development Index, for instance, points in this direction. We label this important element “added value to citizens” — i.e., benefits that governments demonstrably deliver to their populations.

The recognition that resource constraints are not primarily a problem of the global commons, but that they hit every nation differently depending on how well the country is prepared or how significantly it is exposed to resource dependencies. In other words: Wait for global consensus, and risk the future of your country. This is an issue that needs a bold response from every country. It cannot simply be solved by international treaties and protocols.

The New Model

The idea is simple: In a time of growing resource constraints, we need to update national competitiveness strategies. While the elements of traditional competitiveness still hold, it has become clear that one key factor, national debt, is starting to overshadow all others and needs far more attention. We call this realization Competitiveness 1.5.

But the debt crisis is merely a symptom of a larger structural problem: The fact that resource dependencies and associated costs and disruptions are becoming one of the key drivers of economic success. In the past it was rational to ignore it, since it was a declining cost factor. But to operate today without aggressive resource policies could in time erode all progress achieved through the classical model.

An updated model of competitiveness that is fit for the emerging future of global ecological overshoot must embrace the nexus of resources and sovereign debt as key factors for national progress. The model we propose, Competitiveness 2.0, can be presented as three key principles:

License to Operate: Competitiveness 1.5 recognizes that without financial stability, countries lose their license to operate. As deficits mount, particularly with the prospect of low-growth futures, the debt dynamics may shift, leading to runaway debts and countries that are insolvent. To succeed economically, we need to focus more attention on the question: How healthy is the financial situation of the government?

Resource Balance: Without adequate access to resources, economies will be stifled, if not strangled. Resource costs have the potential to grow exponentially and devastate economic growth. One key question becomes: How dependent is an economy on foreign resources? How much do nations use compared with what they have themselves, and how big are the resource costs compared to their GDPs?

Added Value to Citizens: What ultimately matters to a country’s stability and success is not GDP, but the overall improvement that the economy generates. This could be measured as increase in per-capita wealth (across all capitals) or a broader sense of change in human well-being, as quantified by the Human Development Index. The key question becomes: Do citizens feel they are being served and treated fairly?

Without attending to these new Competitiveness 2.0 principles, it is unlikely that countries will succeed in the new era.